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  1. China’s yuan pulls away from 5-1/2-year lows; weakness seen ahead

China’s yuan pulls away from 5-1/2-year lows; weakness seen ahead

The yuan found some respite against the dollar on Thursday, pulling away from 5-1/2-year lows as the US currency took a breather from its recent surge.

By: | Shanghai | Published: July 7, 2016 11:42 AM
markets The yuan’s fall has been exacerbated by Britain’s shock vote last month to leave the European Union. (Reuters)

The yuan found some respite against the dollar on Thursday, pulling away from 5-1/2-year lows as the US currency took a breather from its recent surge.

The yuan’s fall has been exacerbated by Britain’s shock vote last month to leave the European Union, which battered most emerging currencies, but the renminbi’s weakness has also revived memories of China’s surprise devaluation last August and another rapid depreciation early this year.

Even before Brexit, most market watchers polled by Reuters had already expected Beijing would allow the yuan to weaken modestly this year as the economy continues to slow.

The People’s Bank of China set the midpoint rate at 6.6820 per dollar prior to market open, 0.06 per cent firmer than the previous fix of 6.6857.

Spot yuan opened at 6.6856 per dollar and was changing hands at 6.6826 at midday, firming 0.2 per cent from the previous close.

The Chinese currency has fallen about 1.6 per cent since Brexit, more than some regional currencies such as the Korean won and Taiwan dollar.

Some analysts speculate that the People’s Bank of China may be taking advantage of global currency declines against the dollar to engineer a fresh bout of yuan depreciation, although the central bank has repeatedly stated it has no such intention.

“We don’t know how far the yuan would fall,” said a trader at a Chinese commercial bank in Shanghai.

“I suspect the yuan would weaken to more than 6.8 per dollar before the central bank would say that’s enough.” Policy sources told Reuters recently that China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support struggling exporters.

That would imply a depreciation of 4.5 per cent for the full year, matching last year’s record decline.

“It’s rather difficult to gauge the situation right now, especially given the Brexit aftermath is still reverberating,” said another trader at another Chinese commercial bank.

In a commentary on Wednesday, China’s Foreign Exchange Trade System (CFETS) said that due to rising inflation, the yuan’s nominal effective exchange rate needed to depreciate in order to keep the currency’s real effective exchange rate stable.

CFETS also said that China is implementing requirements for foreign firms to settle foreign exchange forward yuan positions in the onshore market.

The offshore yuan was trading 0.19 per cent softer than the onshore spot at 6.695 per dollar.

China is expected to report June foreign exchange reserve data later in the day, which traders will be scouring for any suggestions of a resurgence in speculative capital outflows following the yuan’s recent declines.

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